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November 2010 Archive for Out to Pasture

RSS By: Steve Cornett, Beef Today

Read the latest blog from Steve Cornett.

How to Read the GIPSA Responses

Nov 29, 2010

USDA got tons of responses to its request for public input on its pending GIPSA rule.

Your reporter devoted several hours of his holiday weekend to trying to find a pattern. Maybe it’s just me and my preconceived notions, but what I think I see is that a high percentage of the support for the changes comes from a few cattle producers, a lot of city folks—no few of them women for some reason—and quite a few people who say they were poultry farmers who got abused by integrators.

On the other side, there are a lot of people opposing the proposed regulation with email addresses indicating they work for folks like Cargill, Tyson, Perdue and other processor entities. But in my mostly random searches, a fairly sizable majority of the full time cattle and hog producers, and quite a few apparently satisfied poultry producers, seemed to think GIPSA was overreaching.

Like I said, maybe it’s me. You can do the same sort of search yourself if you want and make your own judgment of the responses. Here’s how I did it: I found the comment site here and near the top, in the “search” blank I typed “GIPSA-2010-PSP”.

That provides (as of Sunday) some 57,000 responses. Then I went through them trying to pick page numbers at random and reading 3 or 4 responses from each page. I was in town on a fast computer and internet connection, so I looked at several dozen. That doesn’t mean I’m right. But I did see some interesting stuff and (BELIEVE IT OR NOT!) it reinforced what I expected. (I bet it works the same way with you and the decision makers.)

One thing I did was when I saw a name odd enough to probably Google well, I tried. That’s how I found Lateaseetta Kiggins, who despite failing to mention it on her MySpace site, is apparently very, very concerned about the issue and, judging by her letter, has a solid grasp on the issues:

“This new proposed rule is an important first step in leveling the playing field for livestock producers, improving market transparency and protecting poultry growers from unfair contract terms. The proposed rule would eliminate the most abusive contract terms and practices used by poultry companies, ban retaliation against growers who speak out about unfair conditions or contract abuses; protect growers who make expensive upgrades to their chicken houses; require notification before companies suspend contracts with growers; and allow growers to opt out of arbitration clauses. Unfortunately, the proposed rule fails to rein in similarly unfair practices in livestock markets. The proposed rule addresses a few specific unfair practices widely used by meatpackers, but it fails to establish guidelines that would prevent meatpackers from unfairly favoring one hog or cattle farmer over another through marketing agreements and contracts. It does prevent one limited kind of price discrimination (the full trailer volume discount), bans packer-to-packer sales, prohibits one auction buyer from representing multiple meatpackers and offers only limited improvements on marketing transparency. These are important and necessary improvements, but do not address most of the widespread unfair treatment in the cattle and hog industry. In addition to implementing this proposed rule as soon as possible, I urge you to take the next steps necessary to address the market power of large meatpackers and require packers to pay a firm bid price for all livestock they procure and require them to sell in an open public market where all buyers and sellers have access.”

I wondered how Lateaseetta and so many others with less Googleable names could come to not only the same conclusion but express it in the same words, and so I used the search term on the Regulations site and found that oddly phrased “(the full trailer volume discount)” was apparently included in almost 9,000 of the messages.

Clever researcher I am, I suspected there might be a form email at work here. So I Googled the full trailer term and who pops up but our friends at Food and Water Watch? Then I had a turn at checking other distinct phrases. There were 801 responses that included the phrase “The meatpackers and their allies are complaining, but given their unjust treatment of family farmers…”

There were 78 responses saying “Had these provisions been in place years ago, it would have protected me from the major financial loss that I experienced”…

You can play the same game if you want. It’s kind of interesting and provides the best way I can think of to do what respondent Pamela Potthoff suggests.

“As you analyze the comments you have received it is too bad you do not have more information about those writing the letters; such as the size of their operation, current relationship to packers (Are they currently getting preferential treatment?), affiliations in organizations, etc. It seems to me the bigger the operation, the more likely producers are to oppose the proposed changes.”

Pamela (who describes herself as a “medium sized” cow-calf producer) and I agree on that. The more the respondents depend on livestock as their primary income, the more likely they are to oppose the GIPSA rule.

That is hardly a surprise. Most of the polls I’ve seen seem to find strong majorities of professional cattle people in opposition. My personal conversations leave me thinking support within the industry itself is limited to a relatively small group of people. When I Google names from the “pro” list, I find a significant number of the proponents seem to have written letters to editors or served on WORC or R-CALF or other groups in the Willy Nelson lobby for years; folks who love COOL and hate international trade and GMO crops.

But my favorite result from the Google searches goes to an Idaho ranch couple:

“As a family ranch we have seen our cattle market continue to be more controlled by the massive corporate meat packers….Operating costs have sky rocketed, narrowing our profit margins. Family ranches are quickly disappearing as the next generation is forced to seek other employment off the ranch -the profit margin can no longer support multiple generations, unlike years ago when the cattle market was not a captive corporate market”

When I Googled the ranch name and address provided, I found it was a 2-section place with a federal allotment. The price is $3.5 million. Are cheap cattle forcing the sale of a place like that? The pro letters are full of complaints about the disappearance of family farmers, the demise of rural communities and the ever-shrinking cow herd.

They all presume—I’ve seen not one of them offer convincing evidence—that cheap cattle prices have caused that and that the cheap cattle have been caused by packer concentration and processors “ill-gotten gains.” There is no mention of the draw of multi-million dollar paydays.

Please. Do the same thing I did. Take a random sample of the responses. See if it doesn’t strike you the same way it does me. Like I said, my reading is that a preponderance of the beef industry strongly opposes these regulations.

Not that it matters. The smart boys in D.C. told me months ago this whole public comment period was just kabuki designed to provide cover for GIPSA’s controversial administrator to do what he wanted to do when he took the job. There’s no law telling him he has to read the responses, much less give them fair consideration.

My bet: The Administration thinks “we need to adopt these regulations so we can see what’s in them.”

Eastern Livestock’s Bond

Nov 16, 2010

After my post yesterday about Eastern Livestock, in which I cited a rumor about the size of the company’s bond, John Robinson at the Western Livestock Journal sent me a note pointing out that GIPSA maintains a website listing the bonds maintained by traders. http://archive.gipsa.usda.gov/psp/dealersBOC_list.pdf

Sure enough, it shows Eastern right at $875,000—vs. more than $80 million in bounced checks and apparently $120 million floating.

I'm going to tell you everything I know about bonding requirements after 55 years of buying and selling livestock and 40 plus years of writing about it. Are you ready? You got time?

Zip. Zero. 

I have always trusted the system. I harvest some cattle, I haul them to the bonded sale or sell them to a bonded order buyer or haul them to bonded feedyard and sell them to a bonded packer and wait, naively, I guess, for my check. I buy some cattle, I write a check and figure I’ve got title to some cattle.

They are, after all, bonded. The Eastern Livestock thing—that’s less than 8 cents on the dollar if I don’t get my zeros mixed up—makes me wonder just what that means. If it means I’m not protected, then I'd rather do what one guy I talked to suggested: Use Paypal. Or at least get a certified check like I would if I was selling to somebody I don’t know.

If you want a fright, look at the list and notice how many of those traders are bonded only to $10,000. That would, apparently, near as I can figure out without more information, be because GIPSA requires bonds covering the AVERAGE of 2 days’ trade. So, a guy who buys a few loads of cattle a month, or quite a number of loads for a little while each year, wouldn’t have a very high average over 2 days.

So if you sell to such a fellow more than his average—say an entire gooseneck load of weaned calves—you’d be protected only to the $10,000 should he default. I’d never seen that site, and--I don’t know about you--but never in my life have I asked a buyer what he means when he says he is “bonded.” I thought it meant if he went broke before my check cashed, his bond would finally pay off.

I mean, these guys aren’t all like your local sale barn, with lots of pipe and good real estate to back up their bets. Many of them don’t have much more than a Rolodex, a fancy pickup and a girlfriend with too much makeup.

Curiously, the packers carry much larger bonds, according to the web site. Tyson’s bond is more than $88 million. It handles more cattle than Eastern, but nowhere near 100 times more

This all strikes me as curious. I believe we’ll dig into it a little more.

Don’t Blame FDIC for Eastern Livestock’s Problems

Nov 16, 2010

The FDIC thing was plumb wrong.

I finally talked to the folks at FDIC. They say they don’t even regulate Fifth Third. They say the Federal Reserve does that. A lady at the Fed said she would be surprised to hear that they had ordered Fifth Third to call such a note.

She took my number. I can’t imagine anybody at the Fed will call back with definitive information, but it’s a trap to run.

About the same time, I hear on good authority from someone who talked to someone who had talked to someone in a position to know someone who is familiar with the situation—which is approximately the same level of attribution I had on the FDIC blind alley, mind you—that it was an internal decision at Fifth Third.

Bear with me, guys. This chasing rumors in the day of instant deadlines is apparently taking more getting used to, and a bigger toll on my credibility, I fear--than I thought. This story has more alleys than most big feedyards, and a high percentage are blind.

I think I’ll keep reporting the rumors, at least the credible ones, but I’ll keep them identified as such. Then when we smoke out the facts, we’ll report them as that. Hey, I don’t know how to do this internet thing. I’m used to taking a month to sort dull fact from exciting fiction.

Just so you’ll know I’m doing all the due diligence as quickly as a rural phone system allows, yes, I did call the bank. Fifth Third says they can’t comment on the matter because it is still in litigation.

And Tommy Gibson hasn’t called back yet.

What Caused Eastern Livestock’s Problem?

Nov 15, 2010

(See Update: Don’t Blame FDIC for Eastern Livestock’s Problems)

If the rumors are true, and some pretty savvy people think they are, Eastern Livestock may have had less than a million dollar bond to cover the more than $100 million the company had in outstanding checks when it was forced into receivershp.

I call it a “rumor” because nobody at USDA’s Grain Inspection, Packers and Stockyards has called back to verify or deny it.

And it isn’t that I didn’t try. I spent serious hours last week talking to people about the company’s problems. I’m still not sure exactly what happened or how such a respected, long-time firm could run into such problems in what was basically a sideways to up market. This sort of thing is expected during surprise down markets—I can’t begin to tell you how many “broke cattle feeder” rumors I chased back after the dairy buyout. But everybody is a bit surprised this would happen in this market. I can’t tell you many facts. Too many folks didn’t call back.
 
But this is a blog and not a news story, so I can tell you want sounds most likely to most people. First, let’s get one rumor out of the way: Jim Odle at Superior Livestock assured me Eastern was current with them and was always “prompt” in paying for cattle purchased on that auction.
 
So here’s what I think because smarter guys than me think it: I think the Federal Deposit Insurance Corporation told the Fifth Third bank to call Eastern’s notes. Without, obviously, much regard to how many thousands of innocent cattle producers, cattle truckers, cattle traders, cattle auction markets and—by the way, FDIC-insured country bankers—would be impacted.
 
The last official thing I saw last week from USDA said they had found more than $80 million in bad checks. They said there were a total of $120 million written. That won’t all be lost money. The cattle are still there. One would assume there is also a lot of money in Eastern’s account as well.
 
So it won’t all be lost to the people who earned it. But nobody knows how long it will be before they—or the bankers holding their notes—get paid, or how much they will get when it’s all over.
 
A lot of people—and I found nobody who has actually talked to founder and owner Tommy Gibson since the bankruptcy—figure the bond may cover the losses. They say that there is probably a dollar’s worth of asset for every dollar’s worth of float. The key word, of course, being “probably.”
 
Those folks say commission firms like Eastern seldom get paid for cattle until after they’ve written checks to the sellers. Given Eastern’s size—by some estimates it handles 10%-15% of the stocker and feeder cattle selling in the U.S. every year, and probably a higher percentage than that during the fall run—it would be easy to believe $120 million could be out at any time.
 
However, those are folks who say they trust Tommy Gibson. Most of them say they’d be shocked to learn this was the “Ponzi scheme” others believe it was. But even they say, if the rumors of Eastern having just an $800,000-$900,000 bond are true, GIPSA may expect some unfriendly scrutiny from the industry. The P&S regulation says bonds should cover two day’s trade, and GIPSA is charged with making sure that traders keep their bonds up to date.
 
Lots—lots and lots, judging from the cattle insiders I talked to—say that the agency has been strict on auction markets and their bonding requirement, but much less so on traders.
 
No surprise, probably, but several suggested that GIPSA should have been enforcing the laws Congress told them to rather than tying itself into knots trying to develop new, controversial, laws on their own.
 
Whatever the case, this looks to be a royal train wreck in the cattle industry.
 
No few of those hot checks went to ranchers and farmers who had delivered their year’s calf crop to Eastern—or into Eastern’s web of cooperating dealers and brokers. Another big chunk was written to sale barns, especially those in the Southeast where fall calf harvest was in full swing.
 
In many if not most cases, cattle moving through those auctions were combined with larger lots and there is not way to find them. At any rate, the livestock auctions, not the producers who sold the cattle, will stand any loss. Some auctions—there are scores of them holding bad checks--may well fail, in which case their own bonding agencies should protect sellers and buyers alike.
 
For direct sellers, the challenge is much worse. Some of them heard about the wreck in time to turn trucks around. Some auctions did the same. In those cases, they may have a hot check, but they still have their stock.
 
I talked with a couple of feedyard folks who said they are trying to find affected sellers and pay them directly. Chandler Keys at Five Rivers, for instance, said they were “doing everything we can to find them and see that they get paid.”
 
But many loads of the cattle this time of year would have been weaned calves going to stocker operations, where the new owners will have to worry about how sound their titles to the cattle are. And the sellers and their bankers may be caught in a geologically-slow bankruptcy process.
 
It’s early in this. The bank has sued to force Eastern into bankruptcy. GIPSA has sued to get a cease business order. No doubt, later people will start returning phone calls.
 
For now, it’s just conjecture and rumor. But one thing is for sure: It’s the start of a nightmare for a lot of people who did nothing wrong. One would hope that the folks at FDIC and Fifth Third thought long and hard about all the other dominos in the line before pushing one over so suddenly and without warning to such an interdependent industry.

 

“Poorer” Meat? Say What?

Nov 01, 2010

The Associated Press stirred up the industry’s GIPSA skunk fight* last week, and the story underscored how much “too” complex the issue is for reporters...and, alas, for policy makers. That’s one reason I’d feel much better if the final decision on this intra-industry squabble were being decided by an Administration that didn’t seem to regard beef and cattle production as a dietary and environmental problem rather than an important business.

Anyhow, the story that got it started was: AP IMPACT: Beef industry woes may mean poorer meat.

There was much ado about who said what, but the paragraphs that most caught my attention were;

Without a competitive market, experts say, cattle producers could lose the motivation to raise high-quality meat. Some of them might cut corners on medicine, feed and veterinary care.

"Food animal husbandry requires substantial expenditures," said Peter Carstensen, a law professor at the University of Wisconsin and former Department of Justice antitrust attorney. "If you're not going to be compensated for that, your incentive as a farmer to produce the quality just isn't there."

It was enough to tempt me to call Mr. Carstensen to see how in the world he could, if he knew anything about the current state of contracts in the U.S., say such a thing. I’d not heard that argument before. I can’t imagine how anybody could think that systems designed to reward higher standards of production would lead to such self-defeating corner-cutting. We chatted for a while, closing our conversation with the professor saying, “I have a student coming in. I can see I’m not going to convince you.” He hadn’t, but he had some good points, and I’d like to talk with him some more. For one thing, he is tuned into the beef market. And he has done a lot of academic—academic—research on the market. He’s read all the studies I’ve read and cites the parts with which he agrees.  I get the impression he has maybe talked to more of the losers than the winners.

And he’s obviously smarter than me. Still, his quality argument is based on the Pickett case, in which the plaintiffs argued packers treated them unfairly by not offering them contracts. The packers argued they got better cattle, and the plaintiffs produced evidence that the quality grade of the cattle they bought on contract was no higher than that bought in the open market.

One problem here is that when you talk about “quality” in beef, your meat professionals hear one thing and your consumers—as well as AP reporters, law professors and Alabama juries—hear another. I believe we’ve argued before about how badly we need to get the word “quality” out of quality grades. “Quality” in new boots or cars is something everybody wants more of. But not everybody wants more marbling in their beef. And it is so easy to think a “lower quality grade” means less safe or less predictable or, well, “lower quality.”  It looks, in reading the story, that several industry folks had the opportunity to steer the reporter away from assuming that industry concentration was a threat to animal health and beef safety, but opted not to. Other priorities, I suppose.

I’m presuming that’s how the headline came up with that “poorer meat” adjective. I have no idea where they came up with the idea that developing systems to allow more coordination and demand more producer responsibility might lead to less veterinary care. I tried to reach the AP reporters to ask, but ran into a dead end somewhere in the 212 area code.

Anyhow, suffice it to say that the story struck me as being incompletely sourced and one-sided. It was what those of us who spend more time on these issues know to be based on the Obama Administration’s view that concentration in the meat business needs to be corralled. It was one of those stories we reporters like to do where we interview three or four homeowners who are being foreclosed on, ignoring the millions who aren’t, and strum the heart strings of the reader.

Or interview a few successful producers and ignore the guys who’ve gone out of business. We all do it.

I’m still waiting—wanting, I might even say--to be convinced that packer contracts are bad for the cattle industry in the real world. I can see where they’re taking us. Better producers—the guys able to deliver on promises—are doing better than the rest of us. If this is all a game of Texas Hold ‘Em, the better and luckier players keep gathering more chips and facing fewer—and better—competitors.

And don’t we all know that in Hold ‘Em, there is only one eventual winner?

To Mr. Carstensen’s credit, he didn’t cite the fact that many farmers have gone out of business as PROOF! Contracts are bad. He seemed to be arguing that contracts would be fine if they were just offered to everybody on an equal footing. Like, I suppose, an exchange wherein Tyson posts its grid and anybody who wants to meet that can deliver cattle, on some sort of a bid basis, I suppose. I have no big problem with that, and I doubt the packers would mind being thrown into that briar patch.

Beef’s problem is not going to be fixed by administrative edict. Beef’s problem, alas, is not that beef is too cheap. That’s MY problem as a producer. But if beef were cheaper, we’d sell more of it. And if these rules should succeed in making beef more expensive, which is what the proponents seem to expect, we’ll sell less of it. That’s a pretty simple equation. And if we sell less beef, we need fewer cattle and if we need fewer cattle we need fewer cattle producers.

Beef’s big problem isn’t the way the pie is divided. (That, again, is MY problem.) It is the size of the pie. It keeps shrinking, as a portion of GDP and the food dollar. It has been shrinking since the 1970s.

The biggest problem we’ve got is the trade issue, forced on us partly by that damnable BSE thing. Part of the reason is marketing and PR—that health thing. But the bigger reason is beef’s weakness in competing with poultry.

And a big part of the poultry challenge is their business structure. That structure has allowed them to reduce costs and optimize innovation at a much faster clip than what we’ve seen in the beef business. It grants processors considerable control over producers, and reporters have little trouble finding “former” growers willing to complain. But the chicken business is much larger—poultry’s pie is larger—because of it.

Beef has to compete in that world. Mr. Carstensen knows that. As we talked I gathered that his complaint is less with contracting than with concentration of packers. He is of the opinion that there is too little competition. When I ask if contracts aren’t a way that packers can back up their branding promises, he suggests that would be so if there was competitive pressure to produce a quality product. But he doesn’t think there is.

His voice perks up when Wal-Mart’s name comes into the conversation. He is quick to the point of the price pressure on suppliers. He says it needs to be looked at.

For purposes of this post, I am agnostic on that. As a consumer, I like low prices all the time. As a beef supplier, I like higher prices. Monopoly law has always been aimed at protecting consumers. Maybe we should look at ways to protect producers, to force prices higher rather than lower. I’m not sure how that will work in a global marketplace, but I’m sure not against looking.

But the point is that’s the world we live in. If the Obama folks want to change that world—break up Wal-Mart—for instance, that’s one argument. If they want to impose their “fairness first” policy on poultry—force those processors to buy birds in some open bid process—I’m fine with that. Savoring the idea, in fact. Beef was the king of meats back before the chicken moguls figured out the deal they do now.

But, to simply adopt new rules aimed only—only—at policing the size of beef’s pie slices strikes me as folly.

*My dog likes to fight skunks. Three so far this fall. She kills them and fetches them to the front door. They’re dead and she stinks. Nobody wins in a skunk fight.

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